US Defense: Q3 hopes - But, decline goes on with no catalysts

The Q3 setup for US defense remains difficult, with the budget stalled in Congress, preventing the FY27 budget from being fully passed and delaying funding for many programs. The House is on recess until after the November midterm elections, so nothing will happen; the current Continuing Resolution does not include the $155bn in reconciliation in the 2026 budget, effectively a 15% budget cut. Since the start of the war in Iran on February 28th, defense stocks have steadily declined. Given opposition to the war and the size of the deficit, we see little appetite to provide funding close to the President's request, and little that can help these stocks before the election. Key parts of the budget (e.g., missile growth funding) are not even in the appropriations. We have again lowered our relative defense multiples to 80-85% and cut price targets: LHX to $318 (Outperform), NOC to $556, LMT to $564, GD to $365, and HII to $304 (all Market-Perform). We ultimately expect a rising defense bud